Legitimacy repairing strategies

[..] I think that confidence was really damaged during the crisis. We have a journey ahead of us to start rebuilding that (Lope, Danske Bank)

[..] We have been highly exposed to bad attention in critical periods. There have been many unfortunate cases for the sector and also for the firm (Røed, DnB NOR)

Speaking at the CSR Forum in Brussels in 2009, Günther Verheugen, former VP of the European Commission responsible for enterprise and industry, said that “the task of rebuilding trust in business has to start now. It has to be a priority for the business community” (Euractive, 2010). As stressed by Verheugen, the falling level of trust in

business, especially in banking, illustrates the need to better the CSR practices and introduce repairing strategies aiming to boost reputation and legitimacy. Both case firms have

responded to the scrutiny from public opinion and the state by applying more elements of formal CSR programs in order to demonstrate their intentions for future good behavior.

Legitimacy repairing strategies are strategic moves in that they seek to change the society’s perceptions and expectations toward the firm.

Strategic CSR as shared value

An example of how the case firms use CSR in promoting legitimacy and reputation is through their Financial Literacy programs. In DnB NOR the development of the initiative started in year 2000. According to Røed (2010), the bank has a strong focus on educating the consumers which is mutually beneficial for the bank and its customers. In Danske Bank, the Financial

Literacy program is a recent CSR initiative launched in 2008. Apart from the climate program, this is the bank’s largest initiative within CSR (Lope, 2010). The objective of Danske Bank’s program is to educate present or future customers to better manage their private economy. The program targeting 5-9 year olds is not branded. However, the bank plans to extend the program in the coming years to also involve the age groups 10-15 and 16-28. This initiative will be branded so that the firm also can exploit the advantages of

marketing (Lope, 2010). Danske Bank argues that the initiative may create more financially skilled future customers. The Financial Literacy initiatives are examples of strategic CSR, where the banks can exploit their core competencies to favor the society.

[..] We find that this makes a lot of sense to us. We see that there is a challenge in society and we have the competencies to help fix it and maybe we get some really good customers in the future. So for us it’s sort of the ideal CR project because we really want to be able to have some projects where we can use our competencies in a good way. (Lope, Danske Bank)

DnB NOR also find it useful to show accountability in cases where they can apply their core competencies (Røed, 2010). The bank’s financial literacy program includes consumer

economists and pension experts,¹¹ who give advice on the bank’s website and blogs. Negative impacts of the financial crisis have also led Danske Bank to enlist debt advisors¹² to help people manage their finances. The financial crisis has clearly demonstrated the importance of financial skills and education for the well being of individuals, families and society at large.

The financial literacy and advisory services are following what Porter & Kramer (2006) defines as shared value, as it benefits the society as well as the firm itself. The initiatives also fall under the third level of Carroll’s pyramid, namely ethical responsibilities. Banks, while making money and fulfilling the first two levels of economic and legal responsibilities, can also use their positions in society, both physical and virtual, to try and improve the quality of life wherever they can. Observing that the banks are raising and acting upon important societal challenges, and simultaneously possesses the expertise to develop initiatives, are likely to raise the moral legitimacy, as it can be perceived as the right thing to do. It is argued that moral legitimacy is not about whether it benefits the evaluator, but if it promotes social welfare (Suchman, 1995). Pava & Krausz’ (1997) criteria for legitimacy can also be

incorporated in this connection. CSR projects are claimed to be ideal when firms possess knowledge about a specific problem and its solution. The case banks can potentially meet

11 see www.sunnokonomi.no; www.pengebloggen.no

12 see www.danskebank.com/en-uk/CSR/society/Pages/volunteer-debt-advisers.aspx

perceived social obligations and stimulate shared values. Danske Bank has identified several opportunities resulting from their focus on the program:

[..] The program gives us an opportunity to create new products and services that benefit our current and future customers, society at large, and ultimately our own business. (Danske Bank CR report 2009: 32)

This is where the CSR initiative gets strategic. The aim is obviously to change the society’s norms, values and expectations. Both case banks aim at differentiating itself from

competitors, which indeed can create a competitive advantage. What I discover in the market today however, is that other large banks offer similar versions of the Financial Literacy program. CECP found in a survey of European banks that 65% of the sample was running Financial Literacy projects (Arbak, 2009). The survey also indicated that reputation management was stated as the most important reason for engaging in CSR.

Whether the case firms are actually responsible for engaging in this specific initiative is another criterion of repairing legitimacy raised by Pava & Krausz (1997). One could argue that the bank sector alone is not responsible for educating the society with regard to financial skills. The researchers further claim that educational programs are almost impossible to defend from a purely strategic viewpoint. Nevertheless, the interest of the economy as a whole are enhanced to the extent that these programs exist and are successful. Whether it is socially responsible to involve young kids in this sort of game, which clearly involves a hidden agenda, is another matter.

I think it’s actually quite important. The program is for children in the ages 5-9 and our studies show that a lot of the children in this age group get pocket money and have their own cell phones. They early reach the consumer mode and we find it important to develop some good habits with regard to savings and spending. (Lope, Danske Bank)

Helping the youth develop a strong financial literacy foundation can encourage wise financial decisions in the future. In addition, the initiative was not developed by the bank alone, but in close cooperation with stakeholders and experts: The bank held a group of meetings with relevant stakeholders like EU, the UN Global Compact, politicians, consumer councils and schools among others before implementing the initiative (Danske Bank CR report, 2009).

However, it can be argued that the age group 5-9 is far too young to worry about finance, and as a result some public spectators may perceive the initiative as illegitimate.

Strategic restructuring

Danske Bank has confessed through media channels that limited areas of operations have been flawed (DR1 TV-avisen, 2008) and are now acting visibly to remedy these faults. One area where restructuring has been implemented is through the CR secretariats role as monitors and watchdogs. The secretariat cannot re-establish legitimacy directly, but symbolizes

contribution by for instance welcoming new government regulations publicly. The disassociation strategy, introduced in the theoretical discussion, seeks to symbolically

distance the firm from bad influences. Suchman (1995) argues that a caveat of this strategy is that the bank may appear unstable, but the irresponsible actions of banks have necessitated a change of practices.

[..] I think the only way to regain trust is to really show that we might have had a bit of a rocky time, we might have become a bit sloppy while everything was going well, but now we want to get back on track. (Lope, Danske Bank)

The “Better Bank” campaign for instance, launched by Danske Bank during the financial crisis, seeks to inform the public that the bank has acted sloppy for a while, but is now highly disposed on improving and simultaneously innovating some internal procedures and

structures. First, the bank left their famous slogan “do what you do best, that is what we do”.

Second, to erase all doubts about agency problems the Group decided to abolish bonus payments to all branch staff in Denmark (Danske Bank CR report, 2009). With branch profit being the core factor in bonus determination, it was extremely hard for the customers to reveal the underlying motives of their advisors. There were obvious elements of asymmetric

information. Third, they are moving away from their conservative image by implementing a blog and opinion website, by taking a stronger part in the new social media and investing huge sums in digital banking (Future bank, 2010).

You could say that it [Better Bank] is sort of a strategic move that we have made in order to restore faith – of course also to save our image but also trying to get the CR principles implemented better in the bank brand, and closer to the customer [..] We want to be more responsible and really show that when we get some input, feedback or complaints we actually do respond, and we have already launched a lot of initiatives under the “Better Bank” campaign that are aimed at just that. But of course it will take some time for people to actually experience that it is real, that we are actually doing what we say that we want to do (Lope, Danske Bank).

The importance of responding to stakeholder demands is highlighted by Lope (2010). Danske Bank’s focus on blogs and opinion websites can be termed a reactive strategy in that it

respond to negative attention from the public by inviting discussion. However, it also contains proactive elements as the strategy seeks to gain input on how to behave in the future. This

initiative aims at aligning the business objectives with societal expectations. Cultivating a sense of common purpose is crucial for effectively implementing CSR programs, according to Pava & Krausz (1997). By inviting and establishing a frequent, systematic and proactive dialogue with stakeholders, banks are likely to build stronger relations with stakeholders and secure continuous improvement within CSR. Rather than giving an exclusively positive impression that can create scepticism, the firm shows that they are aware that they still have a way to go.

DnB NOR has also implemented elements of the so-called disassociation strategy. The

modification of remuneration policies was the bank’s biggest strategic move made in times of crisis, according to Røed (2010).

What we have experienced earlier is that if incentive structures are not changed it is hard to make other remedies (Røed, DnB NOR)

DnB NOR has certainly made some corrections in times of crisis, but is still keeping

structures that have been criticized heavily in the media. Bonus systems related to branch staff and top managers for instance are kept intact, but parameters have been changed in order to minimize agency problems and foster ethical behavior. The CEO of the bank, however, chose to refrain from bonuses during the financial crisis. CSR initiatives have mainly concentrated on satisfying the retail customers and emphasizing product responsibility. The bank has, for instance, implemented routines with regard to which products are offered to different consumer segments (Røed, 2010). To repair pragmatic legitimacy following irresponsible behavior the firms needs to convince the market that they no longer has an incentive to act unethical. CSR initiatives represent a means of promoting societal norms and interests in exchange for legitimacy. The disassociation strategies implemented by banks may lead the public opinion toward assessing the firms’ utility at a higher level.

Whether the strategic CSR programs are credible and integrated in the case firms, however, can certainly be questioned. With regard to the abolished bonus system in Danske Bank, it could be termed as an easily decoupled initiative as it is expected that it will be

implemented when things have cooled down in the sector. When and if these are re-implemented, it will be crucial for the bank to communicate how they are working on diminishing the agency problems related to remuneration. Restructuring the bonus system could be an idea. The former practice of linking bonuses to branch profit is likely to stimulate

unethical practices. A new system could for instance involve that the advisor gets part of a limited premium based on the profit of the investment, instead of getting commission for selling certain products. A new system should seek to create an incentive for the advisors to give the best advice possible.

[..] The most integrated you can do is to modify products and incentive models. In addition to reputation, customer satisfaction has also increasingly been built into our models. We have to look at the duration. I do not think that this is an easily decoupled initiative, rather the contrary. (Røed, DnB NOR)

Røed (2010) argues that the modification of products and incentive models is among the most integrated moves that can be made by firms. This point is relevant, and can certainly be connected to Pava & Krausz’ (1997) criteria of legitimacy. One could argue that banks have the full responsibility with regard to minimizing agency problems and acting transparent.

Røed (2010) further notes that it is still a question of duration. If the incentive systems are turned back to normal when the bad publicity has cooled down it can certainly be termed as easily decoupled (Røed, 2010). Currently, DnB NOR is also working on updating the tools on creditworthiness. This is a CSR initiative where it is hard to get appraisal from stakeholders, as these initiatives are not visible to the public, but they can certainly be risk mitigating.

With brands located in different institutional contexts the need to tailor crisis management approaches and CSR initiatives is important. An example of a locally responsive strategy is Danske Bank’s staff training in their Irish brands during the financial crisis. Due to the lack of experience with regard to bank crises, the staff was trained to handle both the business side of the challenge as well as the psychological aspects (Lope, 2010).

Executive replacement and bank packages

A survey conducted by Edelman Trust Barometer in 2010 shows improved reputation in the banking sector. The overall rise in trust is tenuous, however, with nearly 70 percent saying business and financial institutions will revert to old habits when the financial crisis has passed. In addition, most expect government to influence banks and financial institutions in the future (Edelman Trust Baromenter, 2010). The latter point was also acknowledged by the CSR secretariats of the case firms, and was discussed in the institutional perspective. In the U.S., Western Europe, and BRIC countries, more than 70 percent say that actions such as firing non-performing managers, repaying bailout money, or reducing the pay gap between senior executives and rank and file workers would restore their trust in the firm (Edelman

Trust Barometer 2010). According to Pfeffer (1981) the most common form of disassociation is executive replacement to signify a desire for change. It is natural to assess the management when organizational crises appear and a bank suffers from lack of legitimacy. Executive replacement could be a relevant move from the board of directors in the case banks examined.

However, managers in Danske Bank and DnB NOR have not been replaced despite heavy critique from the public.

The bank packages can also be discussed in terms of legitimacy. The banks themselves argue that engaging in the plans is a responsible move toward stakeholders (Lope, 2010; Røed, 2010). A benefit of the packages is the strengthened liquidity of banks that make them better able to provide loans to market actors. However, in relation to the last paragraph, it could be argued that one of the biggest problems with the bank packages is that they have not removed underperforming executives. The nationalization of banks has allowed executives to collect large salaries and bonuses despite taxpayer outrage. This has been more evident in the U.S.

than in Scandinavia.

When resources from the community are offered, requirements with regard to the remuneration systems of banks are needed. Regulations for freezing the wages of bank executives were implemented in Norway in 2009, and new regulatory moves are expected during 2010 (DN, 2010). It is reasonable to offer these requirements as it is the taxpayers’

money that is at stake. These actions have also been seen in the U.S., the U.K., Sweden, Denmark and Germany. It has been argued that both case firms were highly dominant in the governments’ preparation of the bank packages. CBS professor Jesper Rangvid argues the importance of listening to the banks, as it is launched in order to help them. However, he finds it to be absurd that one single bank can have as much influence on the end result (Politiken, 2009).

Improvement in sight

Recent surveys have verified improvement for the Danske Bank brand (Lope, 2010), which may indicate that the legitimacy repairing steps taken by the firm so far have been successful.

Customer satisfaction surveys conducted by DnB NOR also show that retail customers became more satisfied with the Norwegian bank during 2009. In the corporate market however, satisfaction levels fell within most customer segments (DnB NOR CSR report,

2009). Nevertheless, Danske Bank and DnB NOR are still not fully recovered indicating that repairing legitimacy and reputation is a long process.